In its simplest form, cash accounting is a system in which a company records expenses and revenues as the money changes hands. 

When your client hands you cash, it is reported in your books. Likewise, when you pay a vendor, the expense is realized. Note that cash accounting has many names, so you may have heard it called cash-basis accounting, the cash method of accounting, or the cash receipts and disbursements method of accounting, among others.

If you remember our discussion of Bookkeeping vs. Accounting, accounting is split into two categories: the cash accounting we discuss here and the more complicated, but also more accurate, accrual accounting. 

Unlike cash accounting, accrual accounting recognizes revenues and expenses as they are posted using accounts receivable and accounts payable journal entries.

The table below gives you a quick and easy reference for the differences:

If you are having trouble keeping track of when your services are ordered vs. when invoices are paid, you should sign up for the Baremetrics kyauta fitina, kuma fara saka idanu akan kudaden shiga na biyan kuɗi daidai da sauƙi. 

Cash Accounting Advantages and Disadvantages

1. Cash Accounting Advantages

There are many benefits to cash accounting, most of which are especially true for new and/or small businesses: 

• Cash accounting is simple and intuitive. This is immensely important when day-to-day bookkeeping is done by someone who isn’t an accountant or specifically trained in bookkeeping. If you are a business of one, or at least operating lean enough that everyone wears multiple hats, then cash accounting will make your life easier.

• You can move up expenses at the end of the year and push revenue forward to minimize your tax burden. Note that some jurisdictions don’t like this, however, and will usually make larger businesses switch to an accrual system when they reach a revenue threshold.

• The saying “cash is king” exists for a reason. Very few companies go bankrupt (having no value) but rather go insolvent (they don’t have the cash on hand to pay for their immediate bills even though they still look profitable in the long term). Cash accounting gives you a glimpse of how much money you have in the bank today. Knowing your ƙona kudi gives you an idea of how much you need to grow your customer base to maintain your growth goals.

If you are looking at strong sales numbers, but they aren’t matching your cash accounts, then you might have an issue collecting past due accounts. A solution could be to connect Baremetrics to your revenue sources, and start seeing all of your revenue in a dashboard mai haske. 

You can even see your abokin ciniki rarrabuwa, deeper insights about who your customers are, forecast into the future, and use automated tools to recover failed payments. Yi rajista don Baremetrics kyauta fitina a yau.

As a SaaS founder, you know that failed payments can break your growth targets. Giving up good clients or failing to collect your asusun ajiyar kuɗi is never the solution, we suggest taking a look at how you can prevent rashin yarda and make sure that your sales charts match your cash balance. 

Cash accounting can be a great way to make sure your business stays solvent. It can help you keep track of your burn and be focused on churn. It also gives you the clear information any investor wants to see.

2. Cash Accounting Disadvantages

However, there are distinct problems associated with cash accounting:

• Cash accounting can give you an unrealistically positive view of your company. If you have a lot of sales today, but are using credit or special purchase agreements to put off paying expenses into the future, then your books might be telling you that you are making more profit than the reality of the situation. 

• Cash accounting can give you an unrealistically negative view of your company. If you needed to make some large purchases to get your company up and running, from furniture to hardware, but your revenue base is still growing, you might seem deep in the red, even though all that equipment is going to drive your business for years into the future. 

Accrual accounting gives your company a much clearer view of its health in the short and long term. For this reason, many companies feel the need to graduate from cash accounting to accrual accounting long before the government compels them to do so. 

However, it can be especially complicated changing from cash accounting to accrual accounting. It is recommended that you hire a professional accountant experienced in such changes to do the work. 

You should also be aware that many tax authorities require special paperwork to be approved before your company is allowed to switch from one system to the other.

Cash Accounting vs. Accrual Accounting

Let’s consider a few simple cash accounting examples to really understand the difference between cash accounting and accrual accounting.

• Your company purchased a new laptop for $2000 in April. The store had a special deal where you do not have to pay until October. In accrual accounting, you record the expense in your accounts payable in April when it is incurred. In cash accounting, you record the expense in October when it is paid.

• Your company has sales of $5000, $10,000, and $20,000 in January, February, and March, but you don’t bill until the following month. In accrual accounting, the revenue is recorded in January, February, and March when it is earned. In cash accounting, the revenue is recorded in February, March, and April when it is received.

As you can see, the key difference is that accrual accounting has you record expenses and revenues immediately, whereas cash accounting has you wait until cash changes hands. 

For this reason, accrual accounting is generally considered more accurate as well as more complicated because you need to later resolve the cash positions of those revenues and expenses.

In addition, when using cash accounting, even though you do not record revenues and expenses into your journals until the cash changes hands, you have to keep track of them somewhere. If not, you’ll quickly find yourself forgetting to make payments or losing track of clients who are behind on their payments!

Bayanin Gudun Kuɗi

Since we are discussing how to keep track of the cash position of your company through cash accounting, let’s delve into the statement of cash flows, also known as the cash flow statement. 

The statement of cash flows, along with the balance sheet, income statement, and statement of stockholder’s equity, is one of the four main accounting statements. 

The balance sheet shows the current value of your company, including its assets, liabilities, and equity. The income statement shows the profit generated by your company over a period. And the statement of cash flows works as a bridge between them by showing the movement of cash into and out of your business. 

The statement of cash flows reconciles the amount of cash in your accounts on the first day of the period with that on the last day of the period. This is important information any new investor will want to see before partnering with you, and all current investors will need to know this to be confident in your subscription service’s sustainability.

The statement of cash flows has three main sections:

• Ayyukan Ayyuka: This includes all main revenue-generating activities of your business as well as any other activities that are not investing or financing. This can include cash flows from current assets and current liabilities.

• Ayyukan Zuba Jari: This includes any cash flows from the purchase or sale of long-term assets and other investments not included in cash equivalents. This can include anything from a new building to new software.

• Ayyukan Kuɗi: This includes any cash flows from changes in the borrowing and equity of a company. The former includes money going into the company from taking on new debt and money flowing to the bank as repayments of existing debt. The latter includes money paid out to owners, as well as any money brought in, for example from new or existing investors.

Cash Forecasting 

A good cash system, along with well-prepared cash flow statements, can protect you from any unforeseen issues.

Having a strong grasp of how much money you have in your account, such as when new money is going in, and when you will need to pay upcoming expenses, allows you to better ride out changes in the market that would otherwise hurt you—or even better – helps you take advantage of new opportunities that come up.

Selecting the right cash forecasting model is fundamental to building your future revenue stream. 

• What is your churn?
• What are your acquisition costs? 
• How do you find new subscribers? 
• Is there any marked seasonality to your growth? 

These are among the questions you need to be able to answer to grow your SaaS business. The answers help you forecast, and forecasting helps you find the answers. This synergy can be unlocked with the valuable information you can find on Baremetrics.

Baremetrics brings you metrics, dunning, engagement tools, and customer insights. Some of the things Baremetrics monitors are MRR, ARR, LTV, the total number of customers, total expenses, quick ratio, and more.

Sign up ga Baremetrics kyauta fitina, kuma fara saka idanu akan kudaden shiga na biyan kuɗi daidai da sauƙi.